By BNZ Currency Strategist Danica Hampton
Once again, the NZD has the dubious honour of being the worst performing currency over the past 24 hours. After climbing to nearly 0.5600 yesterday evening, the NZD/USD has plunged below 0.5400.
Escalating fears about the global outlook and weak equities dominated currency markets overnight. Fears about global recession were reinforced by soft European data (German GDP and Eurozone industrial production) and terrible US retail sales data (ex auto sales dropped 3.1% vs. -1.4% forecast). At the same time, renewed fears about the financial sector sent equities plunging. Deutsche Bank surprised shareholders with news it had racked up a loss of more than US$6b in Q4 and analysts predict HSBC will be forced to raise more capital. The FTSE fell 5.0%, the German DAX fell 4.63% and the S&P500 is currently down 3.00%.
The deteriorating global backdrop encouraged investors to ditch growth sensitive currencies like NZD in favour of the relative safety of USD and JPY. NZD/JPY fell from above 50.00 to below 48.00 and NZD/USD skidded below 0.5400 for the first time since early December.
Sentiment towards the NZD remains extremely poor thanks to the lingering affects of the terrible QSBO survey, Standard & Poor's downward revision to the outlook for NZ's foreign currency credit rating and expectations of aggressive rate cuts when the RBNZ meets on 29 January. As a result, we've tended to see renewed interest to sell NZD against crosses like the AUD. NZD/AUD has fallen more than 4% this week from above 0.8500 to around 0.8150. Keep an eye out for Australia's employment report (due 1:30pm NZ time).
Looking ahead, the combination of concern about the global outlook and the deteriorating local backdrop should ensure bounces in NZD/USD are limited. For today, we suspect the topside will be limited to 0.5480-0.5500. A break below 0.5390 will open up the downside towards the 0.5300-0.5320 region. However, a re-test of November's sub-0.5200 low is looking increasingly likely in coming sessions.
Escalating fears about the global outlook, amid a bout of weak global data and soft equities, saw "˜safe-haven' currencies like USD and JPY outperform last night.
The negative news started in Europe. Annual German GDP fell to 1.3% (slightly worse than analyst forecasts for 1.4%). With the VDMA machine orders association announcing that orders dropped 30%y/y in November, Germany's economic outlook looks likely to deteriorate further in coming months.
And its not just Germany, Eurozone industrial production fell 7.7%y/y in November, well below forecasts for -6.1%. Ratings agency Standard & Poor's cut its credit ratings on Greece's sovereign debt to A-/A-2, citing eroding economic competitiveness and a rising fiscal deficit.
In the US, the economic news was equally dire. US retail sales for December fell a whopping 2.7% (vs. -1.2% forecast) and excluding automotive sales dropped 3.1% (vs. forecasts of -1.4%). Minneapolis Fed President Stern said the current recession will likely continue for "at least another two quarters" as "real and pervasive" credit strains weigh on economic activity.
Global equity markets dropped last night amid profit fears in the financial sector. Deutsche Bank surprised shareholders with news it had racked up a loss of more than US$6b in Q4. Meantime, analysts predict HSBC may need to raise up to US$30b of new capital and Canadian company Nortel filed for bankruptcy. Investors are very concerned about Q4 earnings results in the financial sector, both Citigroup and JPMorgan Chase have brought forward earnings announcements (to Jan 16 and Jan 15 respectively). The FTSE fell 5.0%, the German DAX fell 4.63% and the S&P500 is currently down 3.00%.
In currency markets, renewed concern about the global outlook, risk aversion and weak equities saw investors flock to the relative safety of low-yielding currencies like USD and JPY. EUR/JPY dived from above 119.50 to nearly 116.50 and EUR/USD plunged from above 1.3300 to below 1.3100 "“ its lowest level in about a month. Growing conviction about ECB rate cuts may also be taking a toll on EUR; the ECB meets tonight and is widely expected to cut the cash rate 50bps to 2.00%.
Against the backdrop of a generally firmer USD, GBP/USD fell from above 1.4700 to below 1.4500. However, GBP held up relatively well amid chatter that RBS would be repatriating the proceeds of the sale of its 4.3% stake in Bank of China.
* Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.
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